This week’s FreightWaves Supply Chain Pricing Power Index: 25 (Shippers)

Last week’s FreightWaves Supply Chain Pricing Power Index: 25 (Shippers)

Three-month FreightWaves Supply Chain Pricing Power Index Outlook: 30 (Shippers)

The FreightWaves Supply Chain Pricing Power Index uses the analytics and data in FreightWaves SONAR to analyze the market and estimate the negotiating power for rates between shippers and carriers.

This week’s Pricing Power Index is based on the following indicators:

China syndrome threatens demand forecasts

So as not to bury the lede, this week’s lack of change in the PPI might ultimately prove to be the most exciting stability in quite some time. Unfortunately, such excitement does not arise from any reversal in a demand-side forecast, but rather from a change (albeit one in its early stages) in spot rate activity. Accordingly, and as will be discussed near the end of this column, the PPI’s three-month outlook has once again been bumped up to 30.

This week, the Outbound Tender Volume Index (OTVI), which measures national freight demand by shippers’ requests for capacity, ticked down 1.01% on a week-over-week (w/w) basis. On a year-over-year (y/y) basis, OTVI is down 16.3%, yet such y/y comparisons can be colored by significant shifts in tender rejections. OTVI, which includes both accepted and rejected tenders, can be artificially inflated by an uptick in the Outbound Tender Reject Index (OTRI).

Contract Load Accepted Volumes (CLAV) is an index that measures accepted load volumes moving under contracted agreements. In short, it is similar to OTVI but without the rejected tenders. Looking at accepted tender volumes, we see a dip of 1.37% w/w as well as a fall of 11.9% y/y. This y/y difference confirms that actual cracks in freight demand — and not merely OTRI’s y/y decline — are driving OTVI lower.

This week, brutal news came from the container shipping industry, which is of course a major supplier of over-the-road truckload volumes. First off, both the ports of Los Angeles and Long Beach posted a 22% y/y decline in April’s import volumes — a sign of stifled freight flow to a once-hot (though still supreme) market. Maersk and Hapag-Lloyd, ocean carriers that are titans of container shipping, posted y/y declines in net volume of 66% and 57%, respectively, during Q1. Falling freight rates were largely to blame for these Q1 declines: Hapag-Lloyd saw rates slide 28% y/y, while Maersk suffered a 37% y/y drop in rates.

Any hope for Chinese exports to reverse this dismal state of affairs should be checked by a quick look at port data from 2022. The flow of ocean freight from China last year was restrained by frequent COVID lockdowns and disruptions at the busy Port of Shanghai, leading to a belief that pent-up demand would explode in 2023. But any disruptions in Shanghai were more than compensated by the nearby Port of Ningbo, and current weakness in commodity markets (especially of oil) implies that Chinese manufacturing activity is not exploding as was expected. To be clear, China would love for its manufacturing exports to accelerate right now — the problem is finding willing and/or able buyers stateside.

Of the 135 total markets, 70 reported weekly increases in tender volume, although freight flow in many of the major markets was relatively stagnant.

Cross-border trade with Mexico is heating up the Texan markets of Laredo and El Paso, which saw respective w/w gains in tender volume of 5.23% and 28.4%. Such gains are indicative of a larger trend among U.S. manufacturers: Given the supply chain disruptions caused by China’s erratic and abrupt lockdowns, the rising cost of Chinese labor and the general headaches of trans-Pacific shipping, U.S. manufacturers are increasingly opting to nearshore their operations in Mexico.

That said, tender rejections in these cross-border markets are nearly double the national average, which somewhat inflates their OTVI readings. Rejections have risen in part due to Texas’ recent barrage of truck safety inspections at the border. These inspections, overseen by the state’s Department of Public Safety (DPS), are ostensibly in place to “deter cartel smuggling activity along [the] southern border while increasing the safety of [Texas’] roadways,” per a December 2022 statement from DPS Director Steven McCraw. Mexico’s Secretariat of Economy, meanwhile, has pushed back against these inspections, claiming that they are “causing delays between 8 and 27 hours.”

By mode: As has been the case for the past few weeks, reefer volumes continue to be a marked disappointment. Seasonality dictates that the influx of spring produce should goose the Reefer Outbound Tender Volume Index (ROTVI) at this time. But, and without beating a dead horse, California’s agricultural sector suffered major disruptions due to late-winter storms, while Texas’ aforementioned inspections are slowing Mexican produce crossing the border. Accordingly, ROTVI is down 3% w/w.

Dry van volumes, meanwhile, are merely sluggish and unimpressive. In the absence of consumer demand, which would spur volumes from shippers of durable goods and consumer packaged goods, the Van Outbound Tender Volume Index (VOTVI) is going nowhere fast. VOTVI is down 1.06% w/w, slightly underperforming against the aggregate OTVI.

Blitz Week juices rejection rates

Predictably, tender rejections rose as the Commercial Vehicle Safety Alliance’s (CVSA) International Roadcheck (also known as ‘Blitz Week’) kept some capacity offline. When capacity tightens during this week, it usually does so because owner-operators have previously amassed a tidy sum from profitable freight and are thus comfortable to sit the week out, avoiding the hassle of truck inspections. If OTRI doesn’t change significantly, then that means that there is a significant number of carriers desperate to stay afloat and willing to move loads regardless.

This year, or so I believe, something different happened. Given the sharp, sustained weakness in spot rates, we know that most owner-operators do not have the luxury to sit out Blitz Week — yet OTRI rose anyway. The irony might be that spot freight is so cheap right now that the money is insufficient to incentivize carriers to deal with truck inspections, even though they are staring down insolvency. The downsides — added miles that lead to more maintenance and fuel spending — simply outweigh the meager benefits.

Over the past week, OTRI, which measures relative capacity in the market, rose to 2.89%, a change of 36 basis points (bps) from the week prior. OTRI is now 551 bps below year-ago levels, with y/y comparisons becoming only more favorable as the year progresses.

A true testament to the molasses-laden pace of the federal government was seen in the U.S. House of Representatives this week. On Wednesday, the DRIVE Safe Integrity Act, a bipartisan proposal to increase the accessibility of CDL positions for those ages 18-20, was introduced. I myself will wait for safety data from the pilot program to shake out, but it is interesting to note that the trucking insurance industry has no apparent affiliation with or input on this bill. Without some prior agreement with insurance companies, it is more than likely that premiums will skyrocket for carriers employing 18- to 20-year-old drivers. 

In any case, capacity is too abundant right now for a new inrush of drivers to make sense, while the last “driver shortage” was mostly caused by a scarcity of equipment and jobs with attractive wages, not potential employees. Meanwhile, the brokerage sector continues to suffer a hangover from its overhiring bender: C.H. Robinson, a heavyweight 3PL, announced another round of layoffs last week. The layoffs affected roughly 300 workers, compounding the company’s November 2022 cut of 650 positions.

The map above shows the Weighted Rejection Index (WRI), the product of the Outbound Tender Reject Index — Weekly Change and Outbound Tender Market Share, as a way to prioritize rejection rate changes. As capacity is generally finding freight this week, no regions posted blue markets, which are usually the ones to focus on.

Of the 135 markets, 99 reported higher rejection rates over the past week, though 64 of those saw increases of only 100 or fewer bps.

By mode: Just as it was with volumes, so is it with rejection rates: Reefers are a mode of constant sorrow. Despite the upward pressure offered by Blitz Week, the Reefer Outbound Tender Reject Index (ROTRI) actually fell 22 bps w/w to 2.68%. Other modes saw predictable growth. The Flatbed Outbound Tender Reject Index (FOTRI), though rising 239 bps w/w to 13.8%, failed even to match its levels of eight days prior. The Van Outbound Tender Reject Index (VOTRI) was arguably the winner, pulling up 38 bps w/w from an all-time low to 2.68%.

The Blitzkrieg bump

The main reason for the PPI remaining 25 this week, and for the three-month outlook being bumped up to 30, is the chart below:

The National Truckload Index (NTI) — a seven-day moving average of national dry van spot rates that includes fuel surcharges and other accessorials — is one of our key metrics tracking the health of the trucking industry. But the daily report of the NTI (NTID), shown above, is simply as it sounds: day-to-day movements of national dry van spot rates. The NTID is typically of less importance than the NTI’s seven-day moving average because certain days can throw up random noise that does not reflect the current state of the market.

But Blitz Week, though annual, does reflect the struggle over pricing power between shippers and carriers. That the NTID has established clear upward momentum and has returned to mid-February levels is a sign that carriers are taking advantage of the market. To be sure, the NTI is likely to plateau or even lose some of this week’s gains in the coming weeks, absent any deluge of freight demand from shippers.

These gains are exciting not because they necessarily point to the bottom of the market but because they could indicate growing coordination among a highly fragmented carrier base. Outside of extreme imbalances of supply and demand like the pandemic freight gold rush, pricing power is effectively illusory: dependent less on the number of trucks or loads and more on which carriers are willing to move what at what rates. Given the battering they’ve taken over the past year, more carriers are willing to break rank and accept cheap “garbage loads” in the spot market. 

But if carriers collectively stand their ground, then rates have no choice but to rise — stuff still has to move, after all, and it typically moves on a truck. Thus, if carriers do begin to reject cheap freight en masse, they could avoid the bloodiest scenarios in which owner-operators are decimated by bankruptcies and/or absorbed by large enterprise carriers.

To throw cold water on this excitement, nothing of the sort has proven itself out yet. The PPI still remains at 25 and even the slight optimism of my three-month forecast still implies that shippers will firmly hold the reins of pricing. But it is to some relief that this week the NTI rose 3 cents per mile to $2.16. The linehaul variant of the NTI, which excludes fuel surcharges and other accessorials, similarly rose 3 cents per mile w/w to $1.53.

Contract rates have largely been exempt from this drama, since shippers are proving to be much more judicious when locking in long-term rates. The regularity of such loads means that contract shippers desire a set-it-and-forget-it attitude to their freight, which would be at risk if their carriers went bankrupt. So, while shippers have negotiated lower contract rates, they have not driven them to the bottom of the barrel. Contract rates — which exclude fuel surcharges and other accessorials like the NTIL and which are reported on a two-week delay — fell 3 cents per mile w/w to $2.45.

The chart above shows the spread between the NTIL and dry van contract rates, revealing the index has fallen to all-time lows in the data set, which dates to early 2019. Throughout that year, contract rates exceeded spot rates, leading to a record number of bankruptcies in the space. Once COVID-19 spread, spot rates reacted quickly, rising to record highs on a seemingly weekly basis, while contract rates slowly crept higher throughout 2021.

Despite this spread narrowing significantly over the first few weeks of the year, tightening by 20 cents per mile in January, it has continued to widen again. Since linehaul spot rates remain 88 cents below contract rates, there is still plenty of room for contract rates to decline — or for spot rates to rise — in the coming months.

The FreightWaves TRAC spot rate from Los Angeles to Dallas, arguably one of the densest freight lanes in the country, continues to distance itself from April’s floor. Over the past week, the TRAC rate rose 10 cents per mile to $1.97 — though still a far cry from its year-to-date high of $2.39. The NTID, which has jumped to $2.42, is handily outpacing rates from Los Angeles to Dallas.

On the East Coast, especially out of Atlanta, rates rose and are in line with the NTID. The FreightWaves TRAC rate from Atlanta to Philadelphia rose 3 cents per mile w/w to $2.42. A muted but sustained rally has been seen along this lane since April’s low of $2.27 per mile.

For more information on FreightWaves’ research, please contact Michael Rudolph at [email protected] or Tony Mulvey at [email protected].